Three Dead Stocks Walking
03/18/2009 1:00 pm EST
Jim Jubak, senior markets editor of MSN Money, identifies three stocks whose businesses he says have flaws and so won’t do well in the next recovery.
No rational investor wants to buy a sinking ship. But that's exactly what some of us do in a bear market—or, even worse, in the weeks and months after a bear market finally ends.
We go back to load up on the shares of the winners from the last bull market, ignoring evidence that some of these past winners have suffered so much damage that they'll never become profitable long-term investments again.
Avoiding the bad companies—those in which this crisis has revealed longstanding weaknesses—is a key to avoiding losses.
In this bear market, economic recession, and global financial crisis, all stocks have gotten pummeled as if they were on one-way rides to hell.
Some companies, though, remain weighed down by bad management, overly aggressive expansion/acquisition plans, a mountain range of debt, or underinvestment in core products. And instead of righting themselves when the stormy seas grow calm again, they will flounder, victims of the damage inflicted by the crisis on a hull already weakened by rot.
These stocks may bounce back for a while once the crisis is over, but you don't want to own them for the long run. A bounce would be one last chance to sell before the ship goes under.
[Here] are three stocks that deserve a drop because this crisis has revealed significant flaws in their business model:
- Every portfolio needs a battery stock or two going forward, but I'm concerned about BYD's (OTC: BYDDY.PK) decision to become a car manufacturer at a time when the global auto industry is projecting a long-term capacity glut. If you look at potential return on invested capital, the strategy makes no sense to me (sorry, Mr. Buffett) and smacks of the tendency of Chinese companies to ignore profitability because they have an almost endless capacity to raise cheap capital from state-controlled banks. (It closed around $19 Tuesday—Editor.)
- I'm also going to take DuPont (NYSE: DD) off my watch list because this crisis has let competitor Monsanto (NYSE: MON) increase its advantage in the seed industry by leveraging its huge distribution system. Monsanto has been signing up partners that have promising technology but need to conserve cash in this economy. Monsanto's recent submission for US and Canadian regulatory approval of a drought-tolerant corn seed developed by Germany's BASF (OTC: BASFY.PK) is an example. (DuPont closed above $20 Tuesday—Editor.)
- Applied Materials (Nasdaq: AMAT) comes off, too. Growth in equipment sales to the still-small solar industry isn't enough to make up for the continued consolidation of the computer chip and memory business. Fewer companies are making their own, and the few big foundries gain increased bargaining power from the consolidation. (AMAT closed below $11 Tuesday—Editor.)